In its response to HMRC’s consultation proposals on penalties for late payment of tax, the Association of Taxation Technicians (ATT) has suggested a simpler and more understandable alternative to the HMRC proposal of a new 2.5 per cent tax-geared penalty.

As part of the Government’s reform of tax administration penalties, HMRC has set out proposals for a revised penalty regime for late payment of tax which will apply across a wide range of taxes.1 A radical feature of HMRC’s proposals is the introduction of a new penalty where the delay in paying a tax liability is of between 16 and 30 days. Existing penalty provisions do not currently apply until the delay exceeds 30 days.2

Under the HMRC proposal, tax paid (or made the subject of a Time to Pay (TTP) arrangement)3 in the first 15 days after the due date of payment would incur no penalty. However, tax paid or made the subject of a TTP arrangement in the 16 to 30 day period would incur a penalty calculated as 2.5 per cent of the tax being paid late.

In its response to the consultation,4 the ATT suggests that it would be a lot simpler and more understandable for the penalty rate of interest to accrue immediately from the due date but with the important provision that it would be cancelled if payment or a TTP arrangement was made5 within the first 15 days from the due date. This offers, in effect, a carrot for making payment or initiating a TTP arrangement in the first 15 days, rather than a stick for failing to do so.

Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said:

“We can understand the Government’s objective to achieve a balance between fairness to those that pay on time and flexibility to those that need time to make arrangements to pay a tax liability. We can also understand why HMRC want those taxpayers who need to make a TTP arrangement to engage positively with HMRC as early as possible.

“What we cannot understand is why HMRC think that encouragement to pay more promptly would be delivered by a penalty of 2.5 per cent of the tax outstanding after just 15 days. That equates to an annual interest rate of some 57 per cent. It would result in such high penalties on larger amount of unpaid tax that taxpayers who incurred the penalty would be very likely to appeal against it. The single 2.5 per cent charge incurred at day 16 also provides no additional incentive to pay before day 30.

“By contrast, our suggested model of a penalty rate of interest which started to accrue from the day after the due date for the tax – but which would evaporate if within the first 15 days either the tax was paid or a TTP arrangement was initiated5 – would be much simpler to understand and avoid disproportionate levels of penalty. It would also incentivise payment as early as possible within the 16 to 30 day period as the penalty rate of interest would accrue daily over that period.”

Notes for editors

HMRC’s consultation – found here - was published on 1 December 2017. The consultation period ended on 2 March 2018.

The HMRC consultation also proposes the widespread application of a five per cent penalty where payment is delayed by more than 30 days (a penalty that already applies in Income Tax Self-Assessment but would be extended to other taxes including Corporation Tax under the proposals) plus a penalty rate of interest (possibly eight per cent) starting after the 30 day period.

Where a taxpayer engages with HMRC and agrees a scheduled TTP basis for payment of a tax liability, no penalty applies to payments that are made in accordance with the arrangement. However, normal interest on late paid tax still applies.

Although HMRC’s consultation refers to a TTP being arranged within the 15 (or 30 day) period, HMRC assured ATT at a meeting that it would be the initiation of the TTP process rather than the date when the arrangement was agreed which would be taken as the critical date.